The October issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Monday morning, features the lead story, "Fitch: Short-Term Bond Funds as MMF Subs Need Scrutiny," which reviews Fitch Ratings' recent "Short Term Bond Fund" release, and a profile of Doug McGinley, co-Portfolio Manager of Fidelity Municipal Conservative Income Fund. Also, we recap the latest Bond Fund News, including continued inflows in September and October, and the latest Worldwide Bond Fund statistics. BFI also includes our Crane BFI Indexes, which showed continued gains in September. In other news, ignites wrote Friday on Winners and Losers from Money Fund Changes. We also quote from this below.
Our lead Bond Fund Intelligence story says, "The ultra-, ultra-short or conservative ultra short bond fund sector continues to attract interest from fund managers and seemingly everyone except perhaps investors in big numbers. Fitch Ratings is the latest company to take a close look at the sector, as ratings agency, fund rankers like Crane Data, and servicers move to track and define this growing new space. We cover Fitch's recent update below."
It says, "A release entitled, "Fitch: Short-Term Bond Funds Need Scrutiny as Money Fund Alternatives," explains, "Short-term bond funds have garnered attention as potential alternatives to prime money market funds in light of reforms, but closer scrutiny is warranted by investors due to a lack of standardization and widely varying risks, according to a new report from Fitch Ratings."
It tells us, "Most of the cash leaving prime funds has gone into government money funds ahead of money fund reform taking effect Oct. 14, but investors have shown an interest in short-term bond funds as a higher yielding alternative, and fund managers have responded by launching numerous new offerings. One of the draws for investors is the absence of the liquidity fees and redemptions gates feature that money funds will have with reform."
Fitch's Greg Fayvilevich comments, "Short term bond-funds may attract investors, however there is less transparency in these funds than money funds." The update explains, "The higher yields on short-term bond funds reflect the additional interest rate, credit, and liquidity risks. The newest type of short-term bond funds launched by fund managers in response to the reforms tends to assume slightly higher duration and credit risk than allowed under Rule 2a7, up to one year of duration and a small allowance for 'BBB' rated credits. In the broader universe of short-term bond funds, duration risk is higher, and many funds buy non-investment-grade securities."
It continues, "Liquidity risk is another differentiating factor, since money funds are used as cash management vehicles, but short-term bond funds are generally viewed as appropriate for longer time horizon reserve or strategic investments. This is reflected in the funds' portfolio compositions, with money funds allocating more to liquid government securities while short-term bond funds invest more in less liquid and higher yielding ABS. The difference in risk is reflected in the funds' expected volatility."
Finally, it adds, "Fitch has rated a number of short-term bond funds marketed to investors as MMF alternatives and, in light of the focus on the sector, recently updated its Global Bond Fund Rating Criteria.... The changes are meant to provide investors with additional transparency, which is often lacking in short-term bond funds compared to the information available on money funds."
The BFI "Profile" on Fidelity's Doug McGinley says, "This month, BFI profiles Fidelity Conservative Income Municipal Bond Fund's Doug McGinley. He discusses the ultra-short municipal space and Fidelity's shortest tax-exempt bond fund offering, which celebrates its 3rd anniversary this month. McGinley also talks about his investment strategies and the recent jump in tax-exempt yields. Our interview follows."
A sidebar entitled, "SEC Adopts Fund Portfolio Reporting, Liquidity Rules," explains, "A release entitled, "SEC Adopts Rules to Modernize Information Reported by Funds, Require Liquidity Risk Management Programs, and Permit Swing Pricing," explains, "The Securities and Exchange Commission today voted to adopt changes to modernize and enhance the reporting and disclosure of information by registered investment companies and to enhance liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).... The new rules are part of the Commission's initiative to enhance its monitoring and regulation of the asset management industry."
Our sidebar on Worldwide Bond Funds, says, "ICI released its latest "Worldwide Regulated Open-End Fund Assets and Flows Second Quarter 2016" report, which shows that bond fund assets globally increased by $980 (12.5%) billion in Q2. It says, "Worldwide regulated open-end fund assets increased 1.2% to $39.29 trillion at the end of the second quarter of 2016.... Bond fund assets increased by 3.8% to $8.81 trillion in the second quarter.... The asset share of bond funds was 22% [unchanged from Q1]." (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence.)
In other news, ignites article, "Winners, Losers (So Far) Amid Massive Money Fund Changes," comments, "Friday marks the SEC's deadline for all institutional prime and municipal money market funds to adopt a floating net asset value -- a move that firms have been working on steadily since the agency finalized its new rules for the products in July 2014. The reforms have sparked massive changes to firms' product offerings and systems and incited a $1 trillion exodus from prime funds. And numerous managers have approached this period of flux as an opportunity to gain market share."
It continues, "In fact, at least one close observer of the industry says the gains and decreases in firms' money fund assets since the SEC passed its rule do not have much significance. "This time may be different, but when we've seen what looked like somebody gaining market share in the past, it almost always turns out to be a temporary, transactional phenomenon," says Peter Crane, CEO of Crane Data."
Finally, ignites adds, "Questions for the industry post-Oct. 14 are what factors will induce investors to return to prime institutional products, and how much they might bring back. Investors will likely want to see that prime funds’ NAVs fluctuate very little, for example, and ensure that firms impose liquidity fees and redemption gates on the funds sparingly. Investors also will want to see a bigger yield advantage with prime funds, as compared to government funds."
